3PL Warehouse vs. In House Logistics: Should You Invest in Your Own Warehouse or Outsource Ecommerce Fulfillment?
April 2, 2019
What do you want to learn?
As your ecommerce business evolves, you will need to reevaluate your fulfillment logistics strategy every so often.
Once you’ve grown to a certain point, you will be faced with either obtaining a warehouse and hiring a team to fulfill orders, or outsourcing fulfillment to a third-party logistics (3PL) company. There is no one right way to proceed as it will depend on your unique needs and what you’re willing to take on.
Before you make a decision, there are many pros and cons to weigh, questions to ask, and costs to calculate and compare, as this turning point will affect scalability and the need to invest in headcount, infrastructure, and time to learn the ins and outs of running a large scale fulfillment operation.
Why brands manage their own fulfillment warehouse
Internal fulfillment, DIY logistics, self-fulfillment, in-house logistics — regardless of what you call it, taking on order fulfillment yourself is no easy task. But it does come with some advantages.
1. Have control over inventory and warehouse operations
Completing order fulfillment in-house gives you ultimate control over how your items are stored, picked, packed, and shipped to customers. If you or someone on your team is already an experienced fulfillment expert, your distribution network is a core competency, and/or you’ve already built out your own ecommerce supply chain, you may be at an advantage to oversee retail fulfillment yourself.
Since your business is the only one that will be using the fulfillment warehouse, you can customize your space and processes to your preferences and needs, rather than conforming to a standardized operation shared across many businesses, industries, and products. You can even conduct warehouse audits as often as you want.
2. Offer a fully customizable experience
If you offer unique packaging and customization on every order, there’s a possibility that 3PLs will either be unable to handle that level of customization or charge you hefty fees. Being able to pack items yourself gives you the freedom, flexibility, and reassurance that it will be exactly right each time.
If you’re a subscription box company and offer curated subscription boxes or sell items that are specially gift wrapped, made-to-order, fragile, handmade, or require special care, in-house fulfillment can be very useful.It also ensures that you maintain customer satisfaction that fits within your own workflows and logistics systems.
Why brands outsource fulfillment and logistics services to a 3PL company
Hiring a logistics partner like ShipBob to complete the ecommerce fulfillment process on your behalf can be a big move but one that has a number of inherent benefits for ecommerce companies looking to scale.
“We looked into opening our own warehouses and hiring employees, but couldn’t come close with what 3PLs charge for picking, packing, and shipping. We’d also be worried about scheduling fulfillment shifts, ordering boxes and shipping labels, and dealing with the extra headaches of running logistics.
Most of all, those are hours we’d spend on tasks that are not scaling our business when we could be using those resources for growth. You should spend time doing what you do best, and fulfillment is an easy task to take off your plate.”
Gerard Ecker, Founder & CEO of Ocean & Co.
1. No need to fund or plan for the necessary infrastructure and headcount
When you hand off fulfillment to a partner, there is a lot less for you to worry about when it comes to setup, workload, overhead optimization, and maintenance. The planning, budgeting, financing, and execution of in-house digital fulfillment involves the following:
- Purchasing land and/or leasing warehouse space that meets your needs and plans for growth in terms of square footage, loading docks to receive inventory, and space that will hold the proper shelving units and pallet racks and be optimized to efficiently generate pick lists and pack orders
- Purchasing forklifts, conveyors, and other equipment for the warehouse
- Paying taxes, utilities, office supplies, internet, and other administrative expenses
- Licensing technology, including warehouse management systems (or building a homegrown management software) and other devices to manage an in-house operations team
- Recruiting and hiring staff labor for both hourly employees and management, determining employee benefits, getting workers’ comp and liability insurance, and dealing with payroll in an accurate and timely fashion
- Complying with regulations and obtaining the proper licenses to do business in a new facility, and having the proper certifications to ride a forklifts and other equipment
- Order management and distribution center tasks that include replenishing shipping supplies, including boxes, envelopes, tape, dunnage, labels, printers, and other packing materials
Hidden costs of self-fulfillment can be very expensive and require a great deal of your attention. For instance, due to a rapid growth in ecommerce and the need for warehouse expansion and construction, logistics warehouse tenants can expect to see a 10% rate hike. And it’s not just about the money; many ecommerce companies find that the time it takes to manage inbound and outbound logistics processes would be better spent on more strategic activities to grow their business, ranging from marketing to product development.
“We never wanted to be a logistics company, so we found a really good partner in ShipBob to offer the fulfillment services, technology, and other tools needed to stay competitive. With everything that ShipBob does for us, we can focus on the brand itself, develop content, evolve our existing products, and expand our product lines.”
Matt Dryfhout, Founder & CEO of BAKblade
Another important consideration is how your operations will be able to suddenly ramp up or even slow down when order volume changes. Even the best inventory forecasting can’t always keep up with unanticipated variability in consumer demand. What happens if several staff quit or you have a huge spike in orders? Will you be able to adjust and ship packages out on time? It’s critical to plan for peak season accurately and proactively, in addition to any other highs and lows.
2. Great expertise, partners, and volume
A 3PL is an expert in fulfillment operations and inventory management, including receiving, picking, packing, shipping, labeling, carrier pickups, returns, and more. This makes it easy to quickly get started with a 3PL that already handles large volumes of shipments and fits perfectly into your retail supply chain.
And with volume comes bulk discounted shipping rates, a network of partners that help drive faster and more effective service, a mastery of fulfillment best practices, and the ability to easily scale their workforce and handle any spikes in volume to help ensure a smooth Q4 and holiday season.
“ShipBob’s multiple locations really allow us to scale in ways that a company of our size would not be able to if we tried to own and operate the logistics and shipping components ourselves.”
Francesca Cavallo, Co-Author of Rebel Girls and Co-Founder of Timbuktu Labs
3. Seamless connection to sales channels and excellent IT capabilities
Any modern tech-enabled 3PL will have streamlined shipping and fulfillment solutions for ecommerce businesses. This entails seamlessly integrated systems that connect to all the places you sell online to automatically send orders to the 3PL after they are placed, as well as real-time inventory tracking reports and automated order tracking. You can even manage inventory in your 3PL’s fulfillment center and automate alerts to reorder more when product levels are running low.
“ShipBob’s integration with my BigCommerce store is great. The fact that I don’t have to think about my shipping integration, do anything when someone orders from me, or worry that something might not get to them makes it more hassle-free.”
Tracey Wallace, Founder of Doris Sleep
4. Large geographic footprint for affordable 2-day shipping with 3pl services
Most 3PLs let you store inventory at multiple fulfillment locations near your customers. Reducing the distance your shipment travels to its destination helps you reduce the shipping cost and time in transit. Note: A 3PL is different from an on-demand warehousing platform that simply finds warehouses that have excess space for you to use, as 3PLs run their own fulfillment centers and have visibility into what’s happening inside all of their warehouses.
This makes faster shipping options, like 2-day shipping or same-day delivery more affordable by using ground delivery instead of expedited air, and shipping from fulfillment centers in urban areas near larger pockets of the general population.
“We understand that whatever Amazon does, we also need to do or we are going to lose business. The cost of offering free 2-day shipping through ShipBob is more than covered and offset by all of the additional orders and revenue we’ve gotten as a result.”
Founder of My Calm Blanket
Here’s a in-house logistics story from the founder and CEO of Juspy:
“When all the orders came in I would sit on the floor and start folding boxes, packing product, taping boxes and sticking labels on boxes. My back would be destroyed. It was so laborsome, time-consuming, and tiring. On other occasions I would try to box up 100 orders at a time, but there were physical consequences. From the amount of paper cuts on my hands to having a very messy house, the physical toll was intense. I spent about 3 minutes per order on fulfillment.
I almost didn’t want orders to come in. As a one-woman show, I was self-fulfilling dozens of orders each day out of my home office and packing boxes myself. I did not want to deal with fulfillment.
I barely had any time to work on the creative marketing and branding side of the business. 50% of my time spent was packing boxes. Not only that, but it was a constant interruption. I would sit down to do an email marketing campaign, have to attend to new orders, and completely lose my train of thought and flow.
I had to find a fulfillment partner and began looking for an all-in-one solution. ShipBob was the exact solution I was looking for. Before ShipBob I would have been terrified if an influencer posted about our product, and an instantaneous 1,000 orders came in, I would have had no way to handle that. Now I am totally ready for that.
I think the biggest benefit and joy of working with ShipBob is the blocks of uninterrupted time I have back. I feel so free today. It really takes the stress out as a lone wolf entrepreneur.”
Leonie Lynch, Founder & CEO of Juspy
Is in-house or outsourced fulfillment right for me? 7 questions to answer
Whether you’re a traditional retailer that’s launching a DTC brand, or you’ve outgrown a warehouse space of your own and your team is at maximum capacity, there are many logistical considerations you must not overlook for a high ecommerce order volume.
1. How many SKUs do you need warehoused and fulfilled?
The number of SKUs or unique products you sell will directly affect your bottom line. If you operate your own warehouse, you can choose how you store inventory and use space; A 3PL on the other hand will charge a warehousing fee for each individual SKU.
If you have 3,000 SKUs, you will be paying high inventory storage fees on a monthly basis — especially if those products aren’t turning over quickly. If you have 30 SKUs, your fees with a 3PL will be much lower. Learn more about how 3PL fulfillment costs work here.
2. How will you optimize shipments based on your customers’ locations?
The facilities from which you store inventory and ship orders matter a great deal not just in terms of square footage but also their location and proximity to your shipping destinations. For a business that’s looking to grow, a 3PL’s value is both the ability to scale across the country and send out more packages than you can do in-house.
This nationwide coverage gives you Amazon-like speeds when getting packages to your customers, reducing the time in transit as well as the zones you ship to. The lower the zone, the lower the shipping cost. While these costs may seem incremental at the order level, they add up over time.
3. What does your brand’s plan for growth look like?
Is your order volume consistent month-to-month, seasonal in nature, or ever-increasing over time? The demand you experience and forecast will affect your shipping and handling strategy, as you’ll want to make sure the warehouse space you choose isn’t too big or too small. Will you expand so fast that you quickly outgrow the new space? Or will you never fully expand into the full warehouse and risk over-paying in terms of square footage?
A 3PL provides a safety net for any planned or unplanned spikes in demand without you having to worry about how you will possibly fulfill orders on time or have to lay off staff after the busy season dies down. Thinking through any short-term sales as well as fulfilling products on a long-term basis can help you make the right decision.
4. What level of attention is acceptable to you?
A good 3PL should be able to adapt to your growth and become a true partner of yours from day one.
- Is the 3PL’s customer success team responsive and at your beck and call to answer any questions you have?
- Do you get a dedicated account manager?
- Will they consistently bring things to your attention and be one step ahead of the game?
This level of support — having someone serve as a liaison between your business and the 3PL’s fulfillment team — can really help you stay in the know.
5. What does your returns process entail?
The complexity of your returns process can also affect your fulfillment choice. Some 3PLs offer different options when it comes to returns management such as processing returns and exchanges themselves or having returned items sent back to the seller. If the review process for your store’s returned items is very involved — like refurbishing electronics or ironing clothes — you will want to handle this yourself or find a 3PL that specializes in these services.
6. What are the total fulfillment costs & pricing (comparing apples to apples)?
While there are many variables that go into calculating shipping costs, handling fees can be even more complex to drill into. Making an apples-to-apples comparison can be tough because of the various ways 3PLs charge for different fees (and all the add-on services like kitting and assembly or other customizations), as well as understanding how to associate internal logistics costs at the order level.
For internal fulfillment costs, you’ll need to add up your operational expenses including warehouse labor, rent, and packing supplies per month (e.g., $20,000) and divide this number by your average monthly shipping volume (10,000) for a per-order handling cost of $2.
While this is an oversimplified way to calculate it, you’ll see how it affects your margin: If a customer spends $60 before tax, the cost of shipping is $10, and your per-order handling cost is $2, then the total in-house fulfillment cost for the order is $12, or 20% of the average order value. How does this compare to different 3PLs?
7. Do you want to manage fulfillment yourself?
As consumers, we love how quickly Amazon delivers orders, but as a business, it can be hard to live up to those expectations. If you can’t fulfill orders at that pace and be that diligent in getting packages out the door, your customer experience will suffer. Many brands find that transitioning over fulfillment helps them to refocus their in-house efforts and allows their team to dive into other rapidly growing parts of their business that end up being a better use of their time.
Order fulfillment is one of the most important yet challenging pieces of the ecommerce logistics puzzle. What worked for your business early on most likely won’t help you get to the next level. Whether you’re considering opening your own ecommerce warehouse or outsourcing fulfillment to a 3PL, unprecedented growth requires change.
”As our business grew, fulfilling orders quickly became very time-consuming, and warehouse operations became a challenge. We found ShipBob, who checked all our boxes for a 3PL. They have ended up being the perfect solution for us and we have never looked back!”
Fulfilling in-house is a huge operational and financial undertaking. Good planning is necessary to develop the infrastructure, secure the warehouse(s), and purchase the equipment you’ll need.
On the flip side, it can be tempting to jump into something, especially when a sale or event is quickly approaching with anticipated volume that you know you won’t be able to handle yourself. But not all 3PLs are created equal.
“Even if you’re working with a 3PL currently, there could be a better option out there, which is why ShipBob should be considered.”
Courtney Lee, founder of Prymal
Outsourcing fulfillment to a modern 3PL like ShipBob can eliminate staffing and property issues, help you cut overhead costs, and provide top-notch technology and a strategic network of logistics centers.
Learn more about outsourcing fulfillment
Download the free e-guide, “How to Choose a 3PL for Your Ecommerce Business” and learn more about how a 3PL can help your company scale and get tips for choosing a fulfillment partner.